Latvia’s Plans for New Banking Sector Reforms

Because of numerous warnings to Latvia from the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) regarding weak money laundering regulations being abused by international customers, such as Russia and former Soviet Union countries, Latvia is now rushing to improve their banking sector regulations after being accused by the US of laundering money to North Korea’s nuclear weapons development program.

In response, Latvia’s capital, Riga, is working to crack down on shell companies, remove all deposits made in USD, and limit the amount of non-residential customers each bank can have. Of the 23 commercial banks in Latvia, 11 specifically provide services to non-residential customers. In 2016 alone, Latvia saw 446 million euros ($475 million) in exports from the financial services they provided.

After money laundering claims from the US against Latvian bank ABLV caused the bank to be dissolved in February, the rising issue of shell companies came to light with more than 26,000 shell companies being owned by Latvian bank customers as stated by Peteris Putnins, head of Latvia’s Financial and Capital Markets Commission (FCMC). The US Treasury claimed ABLV had “facilitated transactions for corrupt politically exposed persons and has funneled billions of dollars in public corruption and asset stripping proceeds through shell company accounts.” Because many of ABLV’s depositors were from overseas, Latvia’s financial market was greatly impacted after ABLV was shutdown.

Latvia’s crackdown on their banking sector is limited to banks with non-residential customers after the OECD warned Latvia that non-resident deposits can be “a substantial risk that money obtained from corruption committed outside of Latvia is laundering inside the country” back in 2015. The Organized Crime and Corruption Reporting Project (OCCRP) claimed that during 2011 to 2014 Trasta Komercbanka, a Latvian bank based in Riga, was used by shell companies to launder $13 billion in fraud and corruption schemes in Moldova, while another Latvian subsidiary of a Ukrainian bank, Privatbank, laundered $3 billion. Rietumu Banka based in Latvia with customers that are mostly non-residentials, is also facing an 80 million euro fine from a French court that is accusing the bank of money laundering.

Latvia is currently awaiting a bill to be signed that will prohibit lenders from doing business with companies who cannot provide evidence of real operations while plans are also in place to cut down the number of non-residential bank accounts from 39% in 2017 to 5% and to create stricter regulations for the source and legality funds from past and future non-residents. Putnins has stated that Latvia can expect most of these new reforms to go into effect within the next six months.